U.S. Companies Finding Success in China's Education Market

Education companies from the United States and other countries are moving aggressively to secure a piece of the market in China, where a surging private-sector economy and growing middle class are fueling a demand for services, particularly for Western-style products and school strategies.

Many of the best-known opportunities for education businesses working in China have come in English-language acquisition and college preparation and recruitment. But companies are also establishing a foothold in such diverse areas as early-childhood education, curriculum, and management of schools' Web content and online professional communities.

The players include not only smaller businesses, with a few dozen employees, but also such major companies as Pearson, which employs an estimated 6,000 people in China.

Other education companies also recognize China's potential and are determined to establish a presence in the world's most populous country, which has 1.35 billion people.

"We've got a lot of really great initiatives going on in China," said Mark Dorman, the president of McGraw-Hill Education's international division. The company's work there is near the "core of our international strategy," he added, though the New York City-based publisher recognizes it is not alone in that assessment.

"There's no secret that China is a big, exciting market," Mr. Dorman said. "We're not the only ones who think that."

At the same time, U.S. and other Western companies and entrepreneurs say doing business in China requires them to navigate complicated terrain, full of hurdles that, depending on what they're selling, can include having to secure approval from various levels of government or guard against piracy of software.

College-Prep Market

The attractiveness of China's education market, and the likelihood that it will continue to grow, comes across in an array of research and data that speak to the country's demand for school services and technology, and the ability of its citizens to spend money on those things.

China's appetite for mobile-learning devices, self-paced e-learning products, and digital English-language acquisition is expected to increase steadily over the next three or four years, according to Ambient Insight, a market-research company based in the Seattle area. Revenues for mobile-learning companies in the Chinese market were $490 million in 2012, but are expected to quadruple to $1.9 billion by 2017, powered by the "explosive growth" in mobile Web access, the company projects.

China has more than 590 million Internet users, about 40 percent of the country's population, up from 420 million three years ago, according to Chinese government estimates. The United States, by comparison, has an estimated 245 million Web users—though they make up a much higher portion of its population, roughly 80 percent.

Demand for higher education, especially American-style postsecondary study, has also risen sharply over time—a trend that in turn is driving a desire for a better education that cascades down to families of students in secondary school and lower grades.

A report released this year by the Institute of International Education, a nonprofit group in New York City that promotes exchanges across countries and cultures said China is by far the largest nation of origin of foreign students in U.S. postsecondary institutions. It sent 236,000 students to those schools during the 2012-13 academic year, up 21 percent over the previous year.

American institutions' use of third-party agents to recruit students has come under criticism from those who say those efforts result in too many students coming to the United States ill-prepared for the academic and financial demands of U.S. colleges. Those observers suspect that colleges are recruiting Chinese students primarily for financial reasons, not a desire to bring cultural diversity to their campuses.

Chinese secondary students' college ambitions have long been determined by their performance on the Gaokao, the nation's postsecondary-entrance exam. But as wealth and opportunities to study abroad have increased, many families have demanded lessons to supplement the Chinese curriculum to prepare those students to leave China, said Eddie West, the director of international initiatives for the National Association for College Admission Counseling, in Arlington, Va. U.S.-based companies and those from other countries, he said, are scrambling to provide that academic preparation.

Those programs are geared to "students who are saying no to the Gaokao," Mr. West said.

But the strength of the Chinese market has also drawn U.S.-based companies with other, very different interests, such as Schoolwires, which provides platforms for Web content management and online learning for teachers and students.

Schoolwires, which is based in State College, Pa., first set up an office in Beijing four years ago as a research and development center to serve the U.S. market, reasoning that China was not ready for its products, said Lin Zhou, the company's vice president of platform delivery and Asian operations.

"We've got a lot of really great initiatives going on in China. There's no secret that China is a big, exciting market. We're not the only ones who think that."

Mark Dorman

President, International Division, McGraw-Hill Education

But the company's perspective changed as the school landscape quickly evolved, particularly as access to broadband technology increased in major cities and the Chinese government took steps to expand the number of computing devices in schools, said Mr. Zhou. He is a native of Jiangxi province who attended graduate school in the United States.

Schoolwires, which serves about 1,600 school districts in the United States, is just beginning to build its brand in China, he noted. Since it started selling its products relatively recently, it has signed up less than 10 school and district clients, most of them in the country's wealthier and more developed eastern regions, such as the Jiangsu province and Beijing.

"We are optimistic, but we are also cautious," Mr. Zhou said. "We're new to the market."

Buying Chinese Companies

Some education companies have established or expanded their presence in the Chinese market after purchasing companies there. Two years ago, Pearson bought a Chinese-based company, Global Education and Technology Group, for $155 million. Global Education focuses on preparation for English-language tests such as the Test of English as a Foreign Language, an exam commonly used as a factor in admission to U.S. universities, as well as for tests for occupations.

Today, that program has 687,000 enrollees, and it operates out of about 20 Chinese cities, said Brendan O'Grady, a spokesman for Pearson's international division.

Several factors are driving the interest in those education services, including the overall desire by people in China to learn English and a belief in its "connection to employability," he explained.

Pearson operates in 70 countries and has 45,000 employees, the biggest share of whom work in the United States, with the second-largest share based in China. The London-based company's work in China also includes English-language instruction and K-12 and college textbooks and other materials, Mr. O'Grady said.

Much of the demand for foreign education products and services in China, as in other parts of Asia, comes not from government-run school systems, but from a large "shadow, private system" supported by parents seeking supplemental tutoring and other services they believe will give their children a leg up, said Mr. Dorman of McGraw-Hill.

McGraw-Hill's interests in China are broad. They include a joint venture with a China-based company to provide after-school education; an effort to provide digital learning to Chinese children ages 2 to 6;and work in assessment aligned to curriculum.

In many cases, the need for foreign entities to secure permission from Chinese government agencies such as the Ministry of Education is greater when companies are trying to do business within the government-run system than when they are operating in the private market, a number of company officials said.

China's government-run schools are part of a landscape that "takes a while to navigate," said Mr. O'Grady. Selling products in the private market is typically "much more of a retail business," he said.

Dan Harris, a Seattle lawyer whose firm advises U.S. education companies doing business in China, said setting up operations there typically requires a U.S. company to form a separate company, arrange a process to pay employees and taxes, rent space, and register trademarks—steps that can consume a lot of time and money.

Still, Mr. Harris said, his clients tell him education services in China are "booming through the roof."

Curbs on Speech

Many researchers and other observers have noted the strong emphasis that families in China place on their children's education, and their conviction that it is crucial to those children's future success. Demand for American education products and services in China also can be traced to a tendency throughout Chinese society to regard the country's own education system with a highly critical eye, said Alan Ginsburg, a former director of policy and program studies at the U.S. Department of Education.

That perspective is shaped by the dominant role that tests play in determining Chinese students' prospects, and the belief that the U.S. system encourages more creativity and critical thinking than the Chinese system, he said.

Many people in China believe that "American kids can think and apply what they know," said Mr. Ginsburg, who also formerly chaired the human-resource-development group in the Asian Pacific Economic Cooperation, a coalition that promotes economic development, trade, and investment across the Pacific Rim.

Some Western companies have been criticized over the years for doing business in China, where the Communist central government has a well-documented record of suppressing free speech and censoring products it regards as threatening.

Even if U.S. education companies' work in China does not intersect directly with concerns about basic civic freedoms, there is reason to question whether the products they sell will benefit anyone other than China's moneyed class, said Leo Casey, the executive director of the Albert Shanker Institute, a Washington nonprofit group that supports the labor rights of Chinese teachers.

"The inequalities are so great," Mr. Casey said. "I sincerely doubt [the educational benefits] will get beyond the urban, eastern-seaboard schools that have a great deal more money."

In addition, some U.S. companies attempting to sell products in China, particularly software, have found that the interest in their goods has spawned efforts to steal ideas in ways that violate intellectual-property rights.

Protection of Property

A report released last year by the Business Software Alliance, in a Washington-based group, found that China had one of the highest piracy rates of 20 nations the organization studied.

The report's analysis is based on an estimate of a comparison of the commercial value of unlicensed software, and licensed software, being sold in various countries. China's piracy rate stands at 77 percent, and the value of those illegal software products is nearly $9 billion, a value much higher than the legal market for those products, at $3 billion.

The piracy rate in the United States, by contrast, is 19 percent, and the value of legal software sales, $41 billion, dwarfs the illicit market, the report found.

Mr. Harris, the Seattle lawyer, cited several factors as contributing to high piracy in China, including an abundance of manufacturers capable of making illegal materials, the overall power exerted by businesses involved in counterfeiting goods, public apathy about the problem, and the overall lack of risk faced by those engaged in piracy.

Even so, conditions for preventing piracy in China have improved somewhat over time. He added that American education software businesses that are vigilant about taking legal and technological steps to protect their intellectual property can reap big rewards.

"Smart companies can thrive in China," he said, if they know the landscape and can keep thieves merely "nibbling at the edges."

Coverage of entrepreneurship and innovation in education and school design is supported in part by a grant from the Carnegie Corporation of New York. Education Week retains sole editorial control over the content of this coverage.

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